TAX POLICIES MATTER:HOW PRESIDENT-ELECT BIDEN CAN HELP ST. KITTS AND NEVIS

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Everson W. Hull Ph.D.

Tax policies matter. Tax hikes are “Contractionary”.  They reduce the available pool of disposable income available to households for taking to the grocery store, resulting in a build-up of inventories of unsold items on grocery store shelves.   They are particularly harmful to small Mom and Pop establishments which are struggling to survive.  Facing declining sales, they are left with few alternatives, other than to release workers, sending them to the unemployment lines.

By contrast, tax cuts are “Expansionary”.  They increase the pool of available funds in your wallet, allowing you to proudly show up at the grocery store, holding your head high and offering to exchange a few extra dollars in exchange for a basket of goods.  With the stock of inventories on grocery shelves rapidly being depleted, the grocer is left with no alternative, other than to issue a call to suppliers asking them to increase their shipments to meet your demand.   It is a proud day for the Mom and Pop operator and for the employees.  The unemployment lines grow shorter as those who have been out of work are re-employed; and enjoy the pleasure of using their own hard-earned money for purchasing the full range of goods and services that meets their needs.  It does not get much better than this.

Man must never steal.  It is a violation of public law.  The elegance of the tax cut approach is that the employee can now use his or her own hard-earned money; and is vested with the FREEDOM TO CHOOSE from the full range of products and services that are within his or her budget constraint.  It is a very simple message that the Government of St. Kitts and Nevis understands well.  It has been very deliberate in sustaining St. Kitts and Nevis as a low-tax state, that encourages investors and visitors to come to its shores.  It has embodied this low-tax policy at the local level by taking deliberate steps on holding the line on VAT taxes, increasing the VAT holiday from one to two days.

The two dominant US fiscal policies that were sufficiently large to propel the US. economy forward were (1) a record low tax rate reduction in 2017 that boosted household consumption expenditures, accompanied by (2) a reduction in excessive and burdensome government regulations which spurred business capital investment.  These two forces were of sufficient magnitude and scope to expand the massive (US)$20 trillion economy.  It is an economy that is overwhelming driven by household consumer expenditures and business capital investment.  Combined, they account for 86 percent of the US. economy.  Not a great deal more matters that has sufficient “OOMPH” to move this Gargantuan economy.

World Bank data indicates that the pre-pandemic years — 2017, 2018 and 2019 — were  the best-ever economic performing years in the entire history of (a) the USA and (b) the hospitality centers of St. Kitts and Nevis, the remaining OECS member states and the Bahamas.  Each of these tourist-centric Western Hemispheric states reported their best-ever performance in recorded human history.

As is often stated, when the US sneezes those of us in small island developing states catch a cold.  But, the converse is also true.  When the U.S. economy is impacted by a record high tax cut, it not only spurs a surge in economic activity in the U.S; but there are also significant spill-over benefits that accrue to our region.  In the case of St. Kitts and Nevis, the spillover benefits are largely reflected in US. household and business expenditures on leisure travel.  Indeed, 2018 may be considered a bumper crop tourism year with a record St. Kitts and Nevis and OECS member state high of 1,297,385 visitors.  In the following year, the number of stay-over visitors to St. Kitts and Nevis continued to increase reaching an all-time record-high of 80,509 from the USA.  This was more than three times the number of stayovers from Canada (26,819); and close to nine times the number of stayovers from the United Kingdom (9,389).  These visitors spent EC$545 million in St. Kitts and Nevis which, when combined with the outstanding performance of the Citizenship by Investment program, gave a healthy boost to our economy.

While these phenomenal achievements were being realized by the small island developing states, this tax-induced Golden Age of Capital Accumulation also descended on the mega tourism destinations.  Record high scores in the number of visitor arrivals for 2018 were recorded for: Mexico (41,313,000), Canada (21,134,000), Argentina (6,942,000), Brazil (6,621,000), the Dominican Republic (6,569,000), Chile (5,723,000).  All-time record high visitor arrivals for 2018 are also reported for Peru, Columbia and Uruguay.

The combined U.S. spill-over benefits thrust St. Kitts and Nevis close to the head of the 34-member Western Hemispheric Performance class.  With the exception of Canada and the USA, St. Kitts and Nevis now holds the prestigious Number Three per capita income ranking in the Western Hemispheric region.  Only the Bahamas and Panama are higher.

It is to be noted that the IMF’s Regional Economic Outlook for October 2020 provides additional good news on the outstanding performance of the St. Kitts and Nevis economy. The IMF forecasts a sharp rebound in economic growth of 8.0 percent for 2021. The only states that are higher are Aruba at 9.1 percent and Belize at 8.1 percent. All other Western Hemispheric states are expected to grow at less than 8.0 percent.

Notwithstanding these very visible achievements, there is an important lesson that the very distinguished U.S. President-elect has not learned.  His fiscal policy aimed at “punishing the rich“ will exert a contractionary force on the St. Kitts and Nevis economy that retards its economic growth.  The proposed high tax policy that focuses on primary income earners shows little recognition of the devastating secondary effects that are harmful to the masses on the street who rely on the rich for feeding their families and keeping a roof over their heads.  It is regrettable that a small few would regard the spill-over benefits that accrue to St. Kitts and Nevis as crumbs.  One observer pejoratively described the benefits that have catapulted St. Kitts and Nevis to the head of the regional performance class as: “promoting a form of governance that is all about the richest getting richer with just enough crumbs falling to the less well-off to make them feel something is happening”.

It leaves one to wonder how the students and parents at Morehouse College reacted when black billionaire philanthropist  Robert Morris announced in May of 2019 to the graduating class at his alma mater that he would pay off the outstanding student  debt of the entire graduating class of 400 students. Would the students and parents who are struggling to pay their academic tuition and housing costs view this very generous $34 million donation as “crumbs” from Robert Morris’ table?  Was the donation made by black billionaire Tyler Perry to pay the groceries for seniors and high-risk shoppers at 44 Atlanta Kroger stores also to be viewed as “crumbs”.

Or, should a struggling student hustling the graveyard shift on the mean streets of Washington DC driving a taxicab to make his tuition payments also regard the generosity of one wealthy donor as crumbs?   I happen to be a product of those so-called “crumbs” from the rich man’s table as are all of us, without exception, whose pay-check results from the expenditures of someone else.  In my case it was a wealthy donor who I picked up in my taxicab for a run to Dulles International Airport 26 miles from downtown DC.   He was fascinated by the research that I was involved in on the Sugar industry of St. Kitts and the challenges encountered in accessing the data to be used for my Master’s thesis. 

He asked me to stop by his office on his return. He provided me an airline ticket to travel to Basseterre on Pan American Airlines to collect the required data.  Upon my return, he took me to meet a number of executives at one of the largest firms in DC.  I was hired.  It was my first professional job in the U.S.A.  This to me was by no means “crumbs”.  It is the generosity of human beings who have done well, sharing their income and wealth with those who are the least among us. 

St. Kitts and Nevis is a low-tax sovereign state.  We are fully aware of the human capital exodus that has been long underway as the masses flee the “PUNISH THE RICH“ high-tax rates of New York and Los Angeles to seek refuge in the low-tax lone star State of Texas.  We are also aware of the devastating effects of sanctions against the Governments of Venezuela and Cuba, the harmful spill-over effects on the Little Man on the Street are inescapable and so too is the inevitable human capital flight that follows.    

If the announced threats by the President-Elect to invoke a “Punish-the-Rich High-Tax Policy” on US. households and businesses is imposed, there will likely be challenging times ahead.  Policy actions that are aimed at “punishing the rich” have both primary and multiplicative secondary effects; with the secondary effects often accounting for multiples of the initial primary harmful effects. 

The contractionary high tax forces will return the U.S. towards an average annual lethargic growth rate of 1.6 percent per annum, of the prior Biden 8-year term. It is the slowest annual average growth rate of any U.S. presidential term over the last 67 years;  resulting in record high unemployment rates in the U.S.; wiping out the record low rates of unemployment realized for Blacks and Hispanics in 2017 thru 2019.  This lethargic growth will spill over and will be harmful to the outstanding achievements that have been realized in St. Kitts and Nevis over the past three pre-pandemic years of 2017, 2018 and 2019.

By contrast, if a new Biden government sets aside its announced high tax policy commitment, there will likely be sustained strong economic growth in the U.S. that will yield significant spill-over benefits to St. Kitts and Nevis, as was the case in 2017, 2018 and 2019.

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